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November 21, 2012

Why Some Advisors, SMA Managers Love to Hate UMAs

UMA offerings are all the rage these days with executives at major wirehouses. These fee-based offerings allow advisors to build portfolios that contain separately managed accounts, mutual funds and ETFs, as well as stocks and bonds.

Comprehensive, holistic investment management is delivered to investors within the simplicity and convenience of one account and one statement. Advisors and their clients no longer need to wade through multiple account statements generated by a variety of outside managers.

Plus, wirehouse home-office staff can view a client’s investments holistically and handle the trading and operations in the UMA account. They also provide customers with overlay management and customized tax treatment. Compliance risk is minimized as brokers deposit client monies into model portfolios with well-defined guardrails.

Best of all, UMA accounts are more profitable to wirehouses and not as portable to rival firms. For example, fees to outside SMA managers typically range from 36 to 38 basis points in a stand-alone SMA account. Migrating an SMA manager to the firm’s UMA platform slashes those fees to around 25 basis points.

Since wirehouses handle the trading and operations, the firms feel that the reduction in fees is justified, because managers don’t need to have as many of their own traders or operations people. Many SMA managers just don’t buy that.

UMA assets are far stickier than assets held in conventional SMAs. Unless a manager is in the same sleeve of the new firm’s UMA, the portfolio can’t be directly moved over. The individual positions can be transferred but must be held outside the UMA account.

It’s a wirehouse executive’s dream come true: an account that is a better mousetrap for the client, more profitable to the firm and held in an account format that’s much trickier to transfer elsewhere.

Cerulli data show through the second quarter of 2012, $100 billion poured into UMAs in the last two years -- a growth rate of 128.3%. SMA programs attracted only $80 billion in the same period, a growth rate of only 16.5% as those accounts started from a much higher base.

UMAs are relatively new products, and it’s not clear if this growth trajectory will continue. (UMAs had $181.5 billion in assets as of the second quarter of 2012 vs. $594.7 billion for SMAs.)

Yet, not everyone is part of the UMA fan club.

Many advisors feel that UMAs are the new generation of proprietary products and that they diminish an advisor's unique value. Even if the advisor selects the managers in each asset-class sleeve, clients may still view their returns as having been generated by, for example, the Wirehouse A Moderate-Aggressive Portfolio.

If the advisor leaves Wirehouse A, can’t a new advisor offer clients the identical portfolio at perhaps a reduced rate? It would seem so, because UMA reporting primarily brands the firm -- rather than the advisor. Similarly, some SMA managers privately gripe that that UMA reporting puts the firm front and center and relegates them to the back of the bus. Manager names are included on client statements, but at some firms this is done in an almost parenthetical manner.

UMA clients no longer enjoy the same bond with their manager as the old SMA clients held. In addition, many UMA clients are kind of hazy as to who their managers even are.

One SMA marketer told me that wirehouses generally don’t provide managers with the names of advisors whose clients are invested in their portfolios. Identifying the right advisors and marketing a particular manager’s portfolios to them is a challenge.

Amongst advisors, there’s largely a generational divide when it comes to UMAs .

Those advisors who are over 50 and grew up with SMAs are more likely to stay the course. Many view their own value added as their ability to assemble the right “best of breed “ managers and to service the client in a high-touch fashion by proactively explaining the rationale behind the manager’s buy-and-sell decisions.

Advisors who entered the business in the last 10 to 15 years mostly recall SMAs as the investments that got pulverized in the 2008 crash. They are more likely to opt for the convenience of the new UMA format.

In private, some smaller SMA managers recount how their wirehouse “partners” jawboned them into transitioning their SMA portfolios over to the UMA platform. Home-office gatekeepers made it perfectly clear that UMAs were central to the firm’s strategy, and that while SMA managers could keep existing assets on the firm’s SMA platform, the UMA was to be the focus of the manager’s future marketing efforts at their company.

These boutique SMA managers scoff at the notion that UMAs are in the best interests of clients. Instead, they view the UMA focus as merely a way to reduce their management fees and bolster wirehouse profits. They view their own trading prowess as superior to that of wirehouse home-office staff and a key ingredient in generating alpha. They disdain the use of UMA models as little more than cookie-cutter, commoditized offerings that deprive high net worth investors of the customization to which they are entitled.

Boutique SMA managers assert that they are far more equipped to deliver the individualized overlay management and tax treatment to a HNW account than a giant wirehouse. For example, some managers say that they provide proactive tax management throughout the year to their HNW accounts. They don’t wait for brokers to call at year’s end to request this service.

Interestingly, one of the boutique brokerage firms that caters to clients with investible portfolios of $5 million or more has a wide variety of SMA portfolios for clients but doesn’t offer UMAs.

In fact, it’s head of manager research has been quoted in the press disparaging UMAs and stating that he doesn’t view model based UMAs as a suitable HNW product. (Large mutual funds companies with SMA offerings have hopped on the UMA bandwagon and profess to be "product agnostic." This is because they are mutual fund distribution companies that view their UMAs as loss leaders.)

It’s good that investments come in many flavors. SMAs are best for some clients, while UMAs are advisable for others.

No one product is appropriate for all advisors or all clients. Thus, it’s up to advisors to consider the pros and cons of UMAs and determine if they make sense for their clients.